Underpromise, Overdeliver

India Inc. has completed its financial year - just a fortnight back. And the annual results have started pouring in, starting with the IT major Infosys Technologies Limited.

Infy for years has been the first company in India to declare the annual results. I don't know the reason behind it. However, it is one of the most keenly watched results in the market. And importantly, it gives an indication of the potential performance of other similar companies.

In the context of financial results, it would be worthwhile to understand the term Guidance.

What is Guidance?

Guidance is the information, usually provided by a company director, about the company's outlook, especially in terms of earnings. Guidance can be positive or negative, and is watched very closely by analysts and investors since it is often a strong indicator of that company's future performance. (Courtesy - Investorwords)

Infosys is a company which gives guidance for next financial quarter, and for the next financial year. It justifies its reasoning and then goes about its task of earning that money.

And usually Infosys - long considered as the darling of the Indian stock market - beats its own guidance by a respectable margin. This sends the market into a state of euphoria. It increases the confidence of the people in the organization and increased the share holder worth.

Consider the complexity of the task at hand. Below is the summary of Infy's guidance over the next quarter and year - extracted from their website (both in rupee term and US dollar term)

~~
Quarter ending June 30, 2011
Revenues are expected to be in the range of 7,311 crore and 7,382 crore
Revenues are expected to be in the range of $1,643 million and $1,659 million

Fiscal year ending March 31, 2012
Revenues are expected to be in the range of 31,727 crore and 32,270 crore
Revenues are expected to be in the range of $7.13 billion and $7.25 billion

~~

Here, you are predicting that you will be earning more than 1.6 Billion USD in just the next three months.

Predicting this figure, I would say, would require a lot of skill. After all, you need to earn this money. And how much you earn would be dependent on the business you do. And for the business you do, there has to be someone who pays. And it will be difficult for you to decide how much will be be willing spend. And then, of course, you need to sell. And selling isn't an easy task.

Add additional complexities. The USD INR exchange rate fluctuates wildly. You have a risk of recession - which is like a slumbering monster. You have the risks of changing regulations. You have the risks of new players on the block. And the established competitors too.

In my modest personal opinion, if Infy projects a revenue as mentioned earlier, which is approximately 18% to 20% above the current fiscal,  and meets that guidance - I think it would be a very respectable performance. You have delivered what you have promised. And if it beats the guidance, then you could call it as icing-on-the-cake.

With this, I fail to decipher the reaction of the market yesterday. Infy met its guidance for FY11 and Q4FY11. Yet the stock lost more than 9% in the Indian market and approximately 13% on NASDAQ.

I would call it knee jerk reaction. It would be unreasonable to expect Infy to beat its own guidance by huge margins year after year. Yes, it can be done in some quarters. And for the rest, even if the guidance is met - it's a job well done.

But the market does not seem to understand that. Why is someone punished for meeting expectations? It's not fair.

All this made one thought rumble though my mind since yesterday - Underpromise, Overdeliver.
Underpromise, Overdeliver Underpromise, Overdeliver Reviewed by Vyankatesh on Saturday, April 16, 2011 Rating: 5

4 comments:

  1. Yes, this has to be correctly calculated to maintain the confidence on the stock market and more stability into it.

    ReplyDelete
  2. Oh my that's alot of economics!! Pretty informative though.. I got to learn something for sure.

    ReplyDelete
  3. Agree with you Mattias.

    Thanks UB. Glad you liked it.

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